Primary risks that may affect operational results, share prices, and the financial condition of the Companies are described below. Matters concerning the future with regard to the following information were those deemed relevant as of the end of this fiscal year.
1. Market and supply
As a chemical manufacturer offering a diverse range of products, the Companies engage in a wide range of businesses which are subject to a number of risks. Risks associated with market volatility and feedstock supply shortages concerning the Companies’ businesses are mainly as follows.
- The Companies' businesses are exposed to price competition. It is expected that the product lines of the Companies will be exposed to severe price competition for various reasons, such as the participation of foreign enterprises in the domestic market, the inflow of imported products as a result of tariff reductions, and the increasing market entry of generic products. Although the Companies are seeking to reduce costs, failure to address price competition may have an adverse effect on operational results and financial conditions of the Companies.
- Overseas sales of the Companies account for more than 60% of total sales, and sales in the Petrochemicals and Plastics Segment and other Segments are particularly large in the Asian market, accounting for a significant share.
Furthermore, a large proportion of sales in the IT-related Chemicals Segment depends on specific customers in China, Korea and Taiwan. Given this situation, in the event that the Companies are required to cut prices due to deteriorating economic conditions in the Asian market or changes in the business standing of client enterprises, such circumstances may have an adverse effect on the operational results and financial condition of the Companies.
- Naphtha, a main feedstock for the Petrochemical and Plastics Segment, is sometimes subject to radical price fluctuations arising from various causes, including public security problems in the Middle East or global economic conditions. If the price of naphtha radically increases, it may have an adverse effect on the operational results and financial condition of the Companies due to a delay in the reflection of such cost increases in product selling prices.
- The supply of naphtha and some other raw materials is dependent on particular geographical areas or suppliers.
Although the Companies are seeking to reduce the risk associated with their inability to procure major raw materials by developing multiple supply sources, there is no guarantee that supply shortages of such major raw materials will not occur. In the event that the Companies cannot procure necessary major raw materials on their own, such circumstances may have an adverse effect on the operational results and financial condition of the Companies.
- Since the speed of technical innovation for products in the IT-related Chemicals Segment is extremely rapid, it is essential that the Companies develop and supply new products to their customers in a timely manner. In the event that the Companies are unable to effectively develop new products that satisfy customer needs, or if an important technical innovation is made by another company in advance, the business results and the financial condition of the Companies may be adversely affected.
- With respect to agrochemicals and household insecticides in the Health & Crop Sciences Segment, the shipments of these products are affected by the cultivation status of target crops, the outbreak of crop diseases or pest infestations, and factors relating to the local climate in various parts of the world. With regard to feed additives, drastic price fluctuations may also occur. If the crop growth is not as good as expected, if disease occurrence or pest infestation does not develop as anticipated, or if drastic price fluctuations occur, such circumstances may have an adverse effect on the operational results and financial condition of the Companies.
- In the Pharmaceuticals Segment, the precipitous decline in Japan’s birthrate and the rapid rise in the country’s elderly population are the prime factors causing the financial state of Japan’s healthcare insurance system to deteriorate. In this climate, measures continue to emerge aimed at curbing healthcare costs by price restraint of branded prescription drug and promotion of generic drug use, and how to best reform the country’s healthcare system continues to be debated. The direction that any healthcare system reforms might take, could ultimately have a significant and negative impact on the Group’s operating results and financial position. Pharmaceutical products are subject to various kinds of regulations in foreign countries as well. The Group’s operating results and financial position may be significantly affected, depending on the future courses of the U.S. healthcare system reform and other administrative measures overseas.
2. Exchange rate fluctuations
The Company and its domestic consolidated subsidiaries import raw materials from overseas and export finished products manufactured in Japan, and the export value of finished products exceeds the import value of raw materials.
If the Japanese yen appreciates against foreign currencies, the products will be less competitive in price compared with products made in foreign countries. Moreover, the reduction in the proceeds received from exports could exceed the reduction in payments for imports. In order to cope with these circumstances, the Companies are seeking to minimize the risks by entering into forward-exchange contracts or making export transactions in Japanese yen. However, since it is impossible to completely hedge risks due to the mid- or long-term fluctuations in the currency exchange rate, there is a possibility that the appreciation of the Japanese yen would exert an adverse effect on the operational results and financial condition of the Companies.
Furthermore, the operational results of affiliated companies in foreign countries are converted into Japanese yen for the purpose of preparing the consolidated financial statement. Depending on the exchange rate at the time of conversion, the values after the conversion into Japanese yen may be potentially impacted and may negatively affect the operational results and financial condition of the Companies.
3. Interest volatility
With respect to the demand for finance, the Companies determine the amount, term, and method of fund procurement, taking into consideration the demand for finance, financial position, and financial environment. In preparation for interest rate fluctuations, the Companies raise funds by combining, as applicable, both fixed interest rates and floating interest rates. If, however, interest rates rise, the increase in interest expense may have an adverse effect on the operational results and financial condition of the Companies.
4. Fluctuation in stock market prices
Since most of the securities held by the Companies are negotiable securities with market prices, if stock market prices decline drastically, there may be an adverse impact on the financial condition of the Companies.
5. Impairment loss
The Companies have adopted asset-impairment accounting. If a significant deterioration in the business environment causes a drastic decline in the market value and future profitability of the Companies’ fixed assets, impairment losses will be recognized and may have an adverse effect on the operational results and financial condition of the Companies.
6. Deferred tax assets
The Companies recognize deferred tax assets based on projections for future taxable income. Should projections for future taxable income change, all or part of the deferred tax assets may be deemed unrecoverable, and this could have an adverse effect on the operational results and financial condition of the Companies.
7. Liability for retirement benefits
The expenses and obligations with regard to retirement benefits for employees of the Companies are calculated on actuarial assumptions such as expected rate of return on pension plan assets and discount rates.
However, in case a worse environment of pension plan assets management leads the assumptions to differ from actual results, or if there are changes to retirement benefit or pension systems, retirement benefit expenses and liabilities may increase, which may have an adverse effect on the operational results and financial condition of the Companies.
8. Overall management
- Overseas business expansion
The Companies intend to expand their business operations in overseas markets, including further expansion in the Middle East and Asia. To conduct business activities in foreign countries, the Companies need to address the potential risks of changes in laws and restrictions, disputes stemming from differences in working conditions, difficulties in hiring and procuring human resources, social disorder caused by terrorism or war, and other factors. In the event that these risks materialize, there is a possibility that such events might adversely affect the business results and financial condition of the Companies.
Rabigh Refining and Petrochemical Company (Petro Rabigh), jointly founded by the Company and Saudi Aramco, is operating an integrated refinery and petrochemicals complex (the Rabigh Phase I Project) in Rabigh, Saudi Arabia. In case the Company should become liable for damages resulting from contingent circumstances, it has obtained overseas investment insurance covering the total investment in accordance with the rules and maximum insurance amount of Nippon Export and Investment Insurance, an incorporated administrative agency of the government of Japan.
For carrying out the Rabigh Phase II Petrochemical Project, an expansion of the Rabigh Phase I Project, Petro Rabigh has signed project financing agreements with a syndicate of financial institutions. The agreements cover loans of approximately US$5.2 billion, more than 60% of the total cost of approximately US$8.1 billion specified for the project. Sumitomo Chemical is providing a completion guarantee covering 50% of the financed amount. Sumitomo Chemical is also serving as guarantor for some of the other loans taken out by Petro Rabigh.
Note that the performance of these guarantee obligations has the potential to impact Sumitomo Chemical’s operating results and financial condition. As with Rabigh Phase I, Sumitomo Chemical has taken out overseas investment insurance for Rabigh Phase II in accordance with the provisions and limits set by Nippon Export and Investment Insurance (NEXI).
- Acquisitions and equity alliances
The Companies are engaging in domestic and international acquisitions and equity alliances with the aim of expanding their business and enhancing their competitiveness. The Companies, however, may not be able to generate the synergies or other positive effects they originally expected due to changes in the business environment surrounding the Companies or their acquisition.
Moreover, a decline of the corporate value of the acquisitions due to any deterioration in operational results or financial condition of the acquisition may have an adverse effect on the operational results and financial condition of the Companies.
- Research and development
The Companies are vigorously carrying out research and development to rapidly commercialize new technologies and new products that will meet customer needs. The research and development conducted by the Companies may sometimes extend over a long period of time, particularly when it includes discovery research in order to create next-generation businesses. In the event that the subject of such research and development is not put to practical use, or if the development of new products is significantly delayed or abandoned, the competitiveness of the Companies may be diminished, which may have an adverse effect on operational results and financial condition of the Companies.
- Intellectual property rights
The Companies have been strengthening their competitiveness by developing and accumulating proprietary technology and know-how that will differentiate themselves from competitors.
Although such technology and know-how are under strict control by the Companies, there is a possibility that some of the proprietary technologies, products, and know-how of the Companies may be unexpectedly leaked to others. Furthermore, intellectual property may not be completely protected in particular geographical areas. In some areas, there is a possibility that the Companies may be unable to effectively prevent a third party from manufacturing similar products that are covered by the Companies' intellectual property rights. Furthermore, the Companies may become involved in intellectual property rights disputes, which might result in outcomes that run counter to the interests of the Companies.
- Quality of products
Although the Companies manufacture a wide variety of products in accordance with globally recognized strict quality control standards, there is no assurance that all the products are free from defects or that no product recall problems will occur in future. Large-scale product liability lawsuits could be extremely costly and have a significant impact on market perceptions of the Companies, which, in turn, may adversely affect the operational results and financial condition of the Companies.
Although our agricultural chemicals and pharmaceuticals that are on the market have been approved in accordance with strict quality examinations in each country, new quality problems or side effects may be identified as a result of progress in science and technology, as well as from accumulated clinical experience. If such unexpected quality problems or side effects are discovered after products have been released onto the market, there is a possibility that such circumstances may adversely affect the operational results and financial condition of the Companies.
- Accidents and disasters
In order to minimize the potential risks of the shutdown of production facilities or accidents involving the production facilities which will adversely affect the Companies, the Companies conduct periodic inspections for all manufacturing facilities.
However, there is no guarantee that such accidents arising out of production facilities or negative effects caused by natural disasters will be completely prevented or reduced. In addition, the business activities of the Companies are becoming increasingly dependent on computer network systems, and although the Companies are working to protect their systems or data by means of sophisticated security systems, there is still the possibility that system network failures may occur owing to electric power interruptions, natural disasters, or criminal attacks on the system, including computer viruses and hackers.
In the event of an accident that causes property damage and/or human injury near the plant, or a system network failure, such circumstances may, in addition to undermining the Companies’ business activities, involve major costs and have a significant impact on market perceptions of the Companies, which, in turn, may adversely affect the operational results and financial condition of the Companies.
- Change in regulations
The Companies conduct their businesses in accordance with the laws and regulations of each country in which they operate. Changes in laws, regulations, government policies, business customs, interpretations or other changes, and the resulting implications, may have adverse effects on the operational results and financial condition of the Companies. Moreover, there is a possibility that legal restrictions on environment and safety for chemicals may be tightened in the future causing the Companies to incur additional costs to comply with tighter regulations.
As the Companies' businesses develop in Japan and elsewhere in the world, they remain exposed to the risks of becoming the target of lawsuits, disputes, or other legal procedures. In the event any significant lawsuits are filed against the Companies, this could adversely affect the operational results and financial condition of the Companies.